Natural Gas Inventories "Dangerously Low" -- Contributor Over At Oilprice -- August 25, 2018

Updates

September 4, 2018: so much for CO2 and global warming. The Brits are going to use a lot of coal this winter. Natural gas getting too expensive; coal is cheap. Link at Platts (beware: lots of jargon):

Bullish NBP spot and winter contract gas prices have focused the power market's attention on the UK's coal-fired power plants, which have recently become more economical to run in the summer as well as in the winter.

The gap between prompt NBP gas and the coal switching channel indicates that, if and when needed, thermal generation is going to be predominantly coal-fired this winter, with higher gas prices opening the way for increased coal-fired generation, despite a strong hike in carbon prices.

Data show 35% efficient coal-fired plants are competing with 45% gas-fired plants.

The UK month-ahead coal-switching price for 45% efficiency was 68.43 pence/therm on Monday, slightly lower than the NBP day-ahead contract assessment of 69.70 p/th.

However, UK month-ahead CSP for 50% efficiency was 78.19 p/th. Platts CSPI is the theoretical threshold at which gas is more competitive than coal in power generation.

When the gas price is higher than the CSPI, CCGTs are more expensive to run than coal-fired plants.

"Despite the gains in carbon over recent months, coal generation has been supported this week by particular strength in the gas market," according to S&P Global Platts Analytics.

"We forecast gas to lose ground this winter too, with the Q1-19 Clean Dark Spread above the Clean Spark Spread. As a result we expect coal generation to be stable year-on-year this winter, despite the closure of 2GW of capacity, while gas generation is forecast to fall more than 3 GW vs Winter-17."

August 26, 2018: Europe's natural gas prices surge to record for summer season.

Europe’s natural gas market is the most bullish it has been in years, as higher-than-expected summer demand and a tighter market drive natural gas price futures to levels last seen during this past winter’s supply crunch and to the highest for a summer season.

Natural gas prices are expected to stay strong and may still have room to rally, ahead of the next winter heating season in Europe that begins in October. 

Contrary to the typical summer lull in Europe’s gas prices, this year the front-month gas price in the UK—Europe’s biggest gas market—for example, is nearing the winter price from December 2017 when a deadly explosion in Austria’s gas hub at Baumgarten squeezed supplies throughout Europe. Immediately after the explosion, the price of gas for immediate delivery in the UK reached its highest level since 2013.

August 26, 2018: natural gas production in the US --

Gulf of Mexico Fact Sheet, EIA: Gulf of Mexico federal offshore oil production accouts for 17% of total US crude oil production and federal offshore natural gas production in the Gulf accounts for 5% of total US dry production. Comment: I believe the EIA data is for the entire US, including Alaska. RBN Energy often limits their NG production discussions to the "lower-48."

US natural gas production: EIA update, December 4, 2017.

From the EIA:

Drilling wells in the Appalachia region has become very productive.

The average monthly natural gas production per rig for new wells in the Appalachia region increased by 10.8 million cubic feet per day since January 2012.

EIA attributes this increase to efficiency improvements in horizontal drilling and hydraulic fracturing in the region, which include faster drilling, longer laterals, advancements in technology, and better targeting of wells.

For example, in West Virginia, the average lateral length per well has increased from about 2,500 feet in 2007 to more than 7,000 feet in 2016. Some operators have recorded lateral lengths as long as 15,000 feet in the Marcellus and 19,000 feet in the Utica. Along with longer horizontal drilling, the days it takes for completion have decreased from about 30 days in 2011 to 7 days in 2015.

Comment: For comparison, lateral lengths in the oily Bakken are around 9,000 to 10,000 feet, and take about 10 days to reach TD, but the range can be quite wide, some still taking as long as 30 days (of course, that is not continuous drilling).

Note: in the EIA graph above, the Appalachia region was producing about 20 billion cf/d as of 2017. The chart below suggests about 25 billion cf/d during 2017. But notice the current rate of production in the Marcellus, nearing 30 billion cf/d in September, 2018. Maybe that's why folks are not concerned about that widening gap in the "natural gas fill rate" as noted in the original post.

Current Appalachia production, ycharts:

Original Post

The following was previously posted, just a few days ago.

NG fill rate, link here. I still think this is going to be the most interesting metric to follow this winter. If it's a cold winter, and if storage rates fall outside the historic minimum going into November, and if the US shale natural gas operators can meet natural gas demand this winter, it means tracking natural gas fill rate is almost meaningless:

Update: I think this is one of the most fascinating stories currently being followed.

If this is a cold winter, it will be interesting to see if the natural gas sector can respond. It it is a cold winter and the natural gas sector responds "without missing a beat," it will suggest to me that the tracking of this metric is absolutely unnecessary.

Having said that, look at this article today from "Ag Metal Miner" over at oilprice.com:

Futures markets are suggesting the currently benign level of natural gas price volatility may not remain through the winter months.

According to the Financial Times, market volatility this year has been the lowest on record despite inventory levels falling 19.5 percent below average and by the time winter starts are set to be at their lowest in more than a decade.

The Financial Times puts this down to investors being lulled into complacency by a seemingly unstoppable wave of new supply from the shale market rising inexorably to meet rising demand.

The government last week forecast 81.1 billion cubic feet per day in dry gas production for 2018 — a record high — and up by 7.5 billion cu ft/d from 2017.

But is the market safe to assume shale gas will supply regardless of demand?

Natural gas producers are systematically hedging their sales throughout next year, often a sign they plan to continue an aggressive policy of drilling and expansion.

That activity has contributed to a dipping of forward prices, as there are more sellers in the futures market than buyers.

But inventory levels are low — some would suggest dangerously low — after a high summer demand due to hot weather increasing demand for air conditioning. Natural gas “power burn” surged to a record 37.7 billion cubic feet per day during July, the Financial Times reports.

So, we'll see.

The FT story is behind a paywall. I could not get to it "thru" oilprice.com but I was able to google and get to it "thru" a Yahoo link.

From the FT article:

When US natural gas futures passed a milestone this month, they did so quietly: volatility fell to the lowest levels since the market’s debut nearly 30 years ago. 

The event seemed improbable. Volatility usually fades when commodity stocks are ample. Yet US gas stocks are 19.5 per cent below average. 

When the winter starts they are set to be at their lowest in more than a decade. This situation is the latest example of how the world’s largest gas market has been transformed by shale drilling. While demand for gas is galloping, it has been met by waves of supply that show no sign of abating. Conditions that put traders on edge a decade ago get shrugs.

And that's way I think it will be fascinating to watch this play out this winter. Especially if it's a cold winter.

Wow, I love to blog.

US Remains The Natural Gas King -- Oilprice -- August 5, 2018

Updates

January 30, 2023: US proved reserves of natural gas grew to new record of 625 trillion cubic feet in 2021. 

October 25, 2021: the original post did not include natural gas reserves in Saudi Arabia. Simon Watkins provides those numbers:

• Jafurah field: 200 trillion cubic feet (compare with reserve numbers in original post)

February 3, 2020: UAE discovery; Jebel Ali reservoir; 80 trillion cubic feet; 

May 3, 2019: Beetaloo Basin, Australia, could add 500 trillion cubic feet; see this post;

December 6, 2018: USGS 2018 Survey of The Permian -- 46 billion bbls of crude oil; 281 trillion cubic feet of natural gas; and 20 billion bbls of NGLs.

Original Post

30-second elevator speech when it comes to natural gas: there is so much natural gas in the world, that as a commodity, it's all about free market capitalism and governmental policies (at all levels) that will determine winners (suppliers/consumers) and losers (suppliers/consumers) for the next fifty years.

For those in the know, I doubt there is anything new here, but some nice data points for future reference.

From oilprice, the data comes from BP's annual review, 2017 data.

US natural gas production (flat over the past three years):

• 2017: 71.1 billion cubic feet per day
• 2016: 71.1 billion cubic feet per day
• 2015: 71.6 billion cubic feet per day
• accounts for 20% of world's total natural gas production

Global history:

• until the 1980s: US dominated global natural gas production
• 1980s: Russia took the lead
• past 50 years: the Middle East has grown its natural gas production at a much faster rate, and is on pace to take the lead in the next decade (2020s)

US history:

• natural gas production in decline until the fracking boom which began in the middle of the last decade (the Bakken boom began in Montana, 2000; in North Dakota, in 2007)
• production from the US grown by an astounding 51% from 2005 to 2015 -- the years of the Bakken boom -- pushed the US back into the global lead (memo to self: note to Jane Nielson)

US exports, LNG:

• 2017: 1.7 bcfpd; about 2.4% of US production
• Asia Pacific: received 41% of this production
• Mexico: received 22%

US exports, pipeline:

• 6.3 bcfpd, or 8.9% of US daily production
• Mexico: accounts fo 64% of the total
• exports to Mexico are growing rapidly; last week, RBN Energy reported that exports to Mexico hit 5.0 bcfpd for the first time ever

****************************

Reserves

So, with all that, I assumed US reserves looked huge compared to the rest of the world, but this is simply astounding.

Reserves:

• Middle East: 2.8 quadrillion cubic feet = 2,080 trillion cubic feet (quadrillion is 10^15; trillion is 10^12)
• US: 309 trillion cubic feet (but see below)

I've long lost the bubble on global natural gas reserves (and I'm sure the reserves are currently way under-estimated) but back in 2016, this post:

Disclaimer: I often make simple arithmetic errors. Numbers rounded. Natural gas reserves according to BP/wiki, 2013 - 2014 (US estimate as of December 2013). Top five countries:

• Russia: 6,000 trillion cubic feet 
• another 11 TCF discovery, 2018; the Arctic
• Iran: 1,000 trillion cubic feet
• Qatar: 900 trillion cubic feet
• Turkmenistan: 600 trillion cubic feet
• US: 350 trillion cubic feet
• #11: Australia: 152 trillion cubic feet (as of January, 2014). (See this post.) 
• Beetaloo Basin could add 500 trillion cubic feet (2019)
• Pakistan: 10,000 trillion cubic feet (highly unlikely, something tells me we are mixing apples and oranges, reserves vs technically recoverable

Now, let's go back and re-run the numbers that were posted earlier:

• that recent huge Mediterranean natural gas find: 30 trillion cubic feet
• Barnett, revised USGS figures: 53 trillion cubic feet
• Utica, newly revised figures: 782 trillion cubic feet
• Marcellus, EIA revised estimates: 65 trillion cubic feet, "proved" reserves
• Bakken/Three Forks, USGS estimate: 7 trillion cubic feet
• Qatar: 800 trillion cubic feet, wiki, conversion
• Mozambique, from the story above: 85 trillion cubic feet

That was back in 2013. Certainly we can do better.

From the 2018 BP review (2017 data), global natural gas reserves:

US natural gas reserves, February 13, 2018, EIA:

• 341.1 trillion cubic feet; increased by 5% over 2016
• Pennsylvania: added 6.1 tcf natural gas reserves, the largest net increase of all states in 2016 as a result of the Marcellus)
• next largest net gains, after Pennsylvania: Oklahoma (3.7 tcf); Ohio (3.1 tcf); SCOOP, STACK, Utica
• natural gas from shale as a percentage of total production: increased from 54% in 2015 to 62% in 2016
• additions exceeded consumption by 30%

Discrepancies, observations, and further comments:

As noted above, the official EIA estimates for the US: 341 trillion cubic feet, but I think those numbers are "way low."

And from the numbers above, the numbers are all over the place (from the official EIA estimates to estimates by others.

Another source suggests the Marcellus-Utica could produce a quadrillion cubic feet -- which greatly exceeds current EIA estimates of total US natural gas reserves.

From NaturalGasIntel, undated but probably in 2015:

The Utica Shale is a massive formation that lies beneath portions of Ohio, West Virginia, Pennsylvania, Kentucky, Maryland, New York, Tennessee, Virginia and a part of Canada.

In a September 2012 report, the United States Geological Survey (USGS) estimated that the Utica has a recoverable potential of 940 million barrels of oil, and approximately 38 trillion cubic feet of natural gas.

That estimate, though, has proved conservative at best. With far more drill bits having proved-up the play in Ohio, a West Virginia University-led study released in mid-2015 estimated that the Utica contains more than 20 times as much technically recoverable natural gas resources than previously thought when the USGS released its report (see Shale Daily, July 14, 2015). 

20 x 38 = 760 trillion cubic feet of natural gas.

Reason #2471 Why I Like To Blog -- Natural Gas Fill Rate -- Zeits

It all started with a short note from Don some months ago; since then I have enjoyed following the "NG fill rate." The link takes you to an earlier post to provide the background; I have a tag at the bottom of the blog, "NG_Fill_Rate."

The subject was a spin-off from "The Road to New England," another tag at the bottom of the blog.

Now that I have a better picture / worldview / feeling for the natural gas fill rate, I can enjoy Richard Zeit's analysis over at Seeking Alpha. A year ago I would have skipped over this article. In fact, I almost skipped over this article until I saw it was written by Zeits. His summary:

• Natural gas supply and demand appear well-balanced, lending support to the Henry Hub stability thesis at ~$4/MMBtu.
• New takeaway capacity schedule in the Northeast Region defines the trajectory of natural gas supply, and is the key driver to monitor.
• Chesapeake sees no relief to the Marcellus North constrained situation in 2015, with gradual relief in 2016-2017. 

Other data points:

The storage deficit versus the 5-year average went from ~900 Bcf at the beginning of the injection season to ~373 Bcf currently. Goes without saying, neither figure should be interpreted as a measure or indication of imbalance between supply and demand, but rather, as a reflection of abnormal weather pattern: the initial deficit was the consequence of the severe winter, and the strong contraction of that deficit is in large part explained by the abnormally cool summer.

The most recent storage injection data provides evidence that supply and demand are in fact in almost a "goldilocks" balance. While storage injections are running at a rate that exceeds the five-year weather-adjusted average, this excess supply is hardly a threat to the Henry Hub price.

First, this surplus is moderate, while storage capacity remains ample, particularly in the producing region.

Second, current injection rate excess over the five-year average is somewhat overstated by weekly headline figures, due to the fact that available storage capacity is more broadly distributed at the moment, relative to what would be a seasonal norm. At the end of a typical injection season, when capacity is near full, some injection points begin to experience congestion, leading to a slowdown in the injection rate. That point has not been reached during this injection season yet.

Folks may want to save this article in another format than simple bookmarking; these articles have a way of disappearing after awhile, requiring a subscription.

By the way, I have said the same thing with regard to Canadian oil sands and the Bakken; a takeaway constraint is not necessarily bad for investors.

It may take some time before the severe constraints can be relieved. The Marcellus North region is particularly constrained. Chesapeake Energy presenting at an industry conference yesterday, made the following comment on the pricing outlook for the Marcellus North:

The pipe access in the Northeast is a challenge. There is a lot of pipes under construction and more in the planning stages. We have an active discussion with all of those pipes, trying to figure out where the best access to markets are going to be, what the best cost structure is going to be. You can map it out and see that there is not a whole lot to expect in terms of huge improvement in 2015. There is more to see in 2016 and then even more in 2017. So, when I think about the basis issue in the Northeast, I do not expect 2015 from a pricing standpoint to be really any better than 2014 and we are planning our business accordingly, that's why we like to keep production flat.

Of note, Chesapeake mentioned that it only needs to run 3-4 operated rigs to maintain its gas production in the Marcellus North flat. This is substantially lower than the 5 rigs/$300 million net maintenance capital estimate that Chesapeake provided earlier year. Chesapeake's net production in the Marcellus North during Q2 2014 was ~0.9 Bcf/d. The company's gross operated production is much higher, at ~2.2 Bcf/d. 3-4 rigs maintaining 2.2 Bcf/d of production flat - this is a truly impressive metric.

The remarkably low rig requirement to keep production flat is a testament to the productive capacity of the Marcellus' sweet spots and shallow production declines from the existing wells after operators put them on restricted choke programs. With Utica demonstrating equally strong productive potential in the dry gas area, production deliverability from the region is very powerful.

Obama's Blind Spot: Oil And Gas And America's Greatness -- August 7, 2014; The Marcellus To Surpass Qatar In Natural Gas Production

From a comment from another discussion board:

"...I'm a huge believer, as some of you know, in anecdotal [data points], and there were 2 interesting pieces of anecdotal [data points] that surfaced this week. The EIA said on Monday that Marcellus production will be at 15.5 billion Bcf per day in August, and they projected it will surpass Qatar's gas production in September. Now Qatar is the world's third-largest producer of natural gas. I think that gives you an idea of the extent of the production ramp-up that's occurring in the Marcellus..."

And we won't hear a thing on this milestone from the current administration. A lot of hard-working, blue-collar workers are making this happen. 

Of course, in his defense, I don't recall Ronald Reagan or either of the Bushes giving a shout-out to the American oil and gas industry either; but, RR, and the Bushes, often visited industrial sites and were always giving speeches on the excellence of the American worker. I remember all the excitement about the movie, a day without Mexicans. I would love to see the sequel, "A Day Without Exxon, Chevron, and Conoco."

This is really quite the story. For as long as I can remember, I always thought Qatar was the #1 (or very nearly the #1) producer of natural gas. Now, it is projected that the Marcellus will surpass Qatar, and that despite all the obstacles to developing the Marcellus, obstacles that Qatar does not face. 

Back To That Marcellus Story

The other day I posted a link regarding new estimates of the Marcellus, and said I would get back to it.

One of the reports adds that the Marcellus reserves that lie below parts of Pennsylvania, West Virginia, Ohio and New York are far larger than recent government estimates, while another said the powerful combination of resource, cost and location is altering natural gas prices and market trends across the nation.

The Marcellus could contain “almost half of the current proven natural gas reserves in the U.S,” a report from Standard & Poor’s issued this week said.

And more:

The Marcellus is a gas-rich formation thousands of feet below much of the four states, but current production is centered in Pennsylvania and West Virginia.

Earlier this year, the federal Energy Information Administration sharply lowered its estimates of Marcellus reserves, from 410 trillion cubic feet down to 141 trillion cubic feet. That adjustment was widely reported, including by The Associated Press. [Hmmmm.]

But that lowered estimate doesn’t correspond with actual well production, said Nikhanj. He said their analysis shows that the Marcellus contains about 330 trillion cubic feet of gas, more than double the size of the next largest field in the nation, the Eagle Ford in south Texas.

Some financial firms and critics of gas drilling had suggested that the EIA estimates supported theories that Marcellus production might decline more rapidly than expected, and thus be far less profitable for energy companies. But Nikhanj said a review of actual Marcellus well data shows that on average they’re producing more gas than expected, not less.

This goes back to that "bogus" NY Times article posted back on June 25, 2011, in which was written:

But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells.

In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles. [Wow.]

“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company,  wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”

It turns out natural gas companies may be challenged but not for the reasons the NY Times suggested. (The Times did subsequently try to "walk back" that story.)

Anyway, enough of this.

Bottom line: the Marcellus is changing the dynamics of the natural gas industry far more than anyone realized. It's an incredible story. RBN Energy has been ahead of the curve reporting this and links have been provided at MDW on a regular basis.

Even the environmentalists are noting the obvious:

Even critics of gas drilling should accept that it isn’t going away, said the head of one leading Pennsylvania environmental group.

“We should realize by now this is not going to be a short play. It’s going to be here, probably for generations, because it’s so productive,” said George Jugovic Jr., president of PennFuture.

That’s a mixed blessing for environmental groups, Jugovic said.

“It lengthens the horizon. It means that we have time to get it right because they’re not going to be in here and out,” Jugovic said of drilling companies, yet “at same time that it raises the imperative of getting our regulations in order.”

Ironically, the vast production coming out of Marcellus wells in Pennsylvania and West Virginia may have given some breathing room to New York, where residents, government officials and gas drillers are engaged in an extended debate over whether to allow the new gas production method known as hydraulic fracturing, or fracking. 

Fracking is under moratorium in New York until the debate is resolved.

The governor of New York is considering letting local municipalities make their own decisions to allow fracking or not. Wow. Hmmm. Local governance. What a concept.